Find out what a health savings account (HSA) is, who can have one, and how to use it the right way.
Money Girl
337 MG Rules for Your Health Savings Account (HSA)
Curious how equity compensation can help build employee financial confidence and move your business forward? Tune in to the latest episode of Morgan Stanley at Work's "Invested at Work" podcast, where we explore the power of financial benefits and how they can help your employees in the workplace and beyond. Listen now by visiting morganstandly.com/investedatwork or stream on Apple or Spotify. Because we believe that when employees thrive, your company thrives too. Again, visit morganstandly.com/investedatwork to listen today. Hi, everyone. I'm Laura Adams, and you're listening to the MoneyGirl podcast. A longtime podcast listener, who also happens to be my husband, asked me. My new dentist requires me to pay for services in full and then submits my insurance claim. What happens if I pay using my health savings account, but get reimbursed by my insurance company later on? In this episode, I'll answer my dear husband's question, tell you what a health savings account is, who can have one, and how to make distributions the right way. A health savings account, or HSA, is a tax exempt account that you can use to pay or reimburse yourself for certain medical expenses, like visits to the doctor or dentist, prescription drugs, and eyeglasses. The great thing about using an HSA is that there's no time limit or requirement to spend the money in the account because it simply rolls over from year to year with no penalty. You can fund an HSA up to certain annual limits using your own contributions, funds from a family member or contributions from an employer. Contributions are made either on a pre-tax basis or can be deducted on your tax return, even if you don't itemize deductions. That means you never pay tax on money that goes into your HSA, which is a really nice savings. Plus, you also get another tax break because the money in an HSA grows tax deferred. However, if you spend any amount of HSA funds on non-qualified expenses, like groceries or a trip to Maui, you could wind up having to pay ordinary income tax plus a 20% penalty on those distributions. But unfortunately, not everyone qualifies for an HSA. To be eligible to open up and contribute to one, you must already be covered by a high deductible health plan. No matter if you get a high deductible health plan on your own or through an employer, you're still eligible for an HSA. These high deductible policies aren't different from regular health insurance policies, except that they have unusually high deductibles. That means you have to pay more out of pocket before your benefits begin. Because you're responsible for more of your medical expenses, a high deductible health plan typically costs much less than a traditional low deductible plan. So let's talk about the annual limits for an HSA and a high deductible health plan. I'll cover three sets of numbers. The minimum required annual deductible, the maximum out-of-pocket expenses that you might have, and what the annual contribution limits are. And these will all be for 2014. In order for a health insurance policy to be considered a high deductible health plan, the minimum annual deductible it must have is $1,250. Now that's for self-only coverage, which is if you're an individual. The deductible is $2,500 for family coverage. The maximum out-of-pocket expenses that you might have to pay with one of these high deductible plans is $6,350 for self-only coverage or $12,700 for a family plan. And for 2014, the annual contribution limit or the amount you can put into your HSA if you have self-only coverage is $3,300. And if you have family coverage, it's $6,550. Now that you know the HSA basics, let's talk about the right way to make distributions or payments from the account, which is what my husband was asking about. I previously mentioned that spending money on non-qualified medical expenses can really cost you. The penalty is 20% plus ordinary income tax on the distribution amount. To find out which medical expenses the IRS allows you to pay for using HSA funds, refer to IRS Publication 969, called Health Savings Accounts and other tax-favored health plans. You'll find a link to this document in the transcript for this show on the MoneyGirl page at quickanddirtytips.com. So how should you handle a situation where you might get a refund for a medical expense from your insurance company? Well, you can choose from two options. The first is to pay the medical expense with your personal funds. Then you can reimburse yourself later on with HSA money when you know if you'll receive a refund or not. You could use an HSA check or transfer funds to your personal bank account from your HSA account online. The second option is to go ahead and pay the medical expense with your HSA funds. However, any refund received would be considered an erroneous distribution if you keep it instead of putting it back into your HSA. But the good news is that when you make a distribution in good faith for a qualified medical expense, you can repay it by April 15 of the following year with no penalty. The repayment gets classified as an adjustment to the HSA, not a contribution that would count against the allowable annual contribution limit, which, as I previously mentioned, is $3,300 for individuals and $6,550 for a family plan for 2014. If you're like my husband and have questions about using your health savings account, please email them to me at money@quickandertitips.com. Now that we're in Q4, it's a good time to start thinking about making memories with the people you love most before the end of the year. We put a lot into the time we spend with our loved ones. 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Listen now by visiting morganstandley.com/investedatwork or stream on Apple or Spotify, because we believe that when employees thrive, your company thrives, too. Again, visit morganstandley.com/investedatwork to listen today. If we haven't connected on social media yet, please visit Facebook and do a search for money girl. On Twitter, you'll find me under username @laraatoms, L-A-U-R-A-A-D-A-M-S with no space. Everything I mentioned is on the money girl page at quickanddirtytips.com. To read a transcript of this show, look for episode number 337, called Rules for Your Health Savings Account. I'm glad you're listening. Ching. That's all for now. Courtesy of Money Girl, your guide to a richer life. Curious how equity compensation can help build employee financial confidence and move your business forward? Tune in to the latest episode of Morgan Stanley at Work's Invested at Work podcast, where we explore the power of financial benefits and how they can help your employees in the workplace and beyond. Listen now by visiting morganstandley.com/investedatwork or stream on Apple or Spotify, because we believe that when employees thrive, your company thrives, too. Again, visit morganstandley.com/investedatwork to listen today. [BLANK_AUDIO]